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Mboweni keeps SA guessing on rate cut
Indicators of financial crisis dominate presentation
February 27, 2009
By Ethel Hazelhurst
While Reserve Bank governor Tito Mboweni continued to parry questions on Thursday about whether the bank would cut rates before its scheduled meeting in April, he repeatedly referred to the financial crisis while speaking at an investment conference in Sandton.
Central banks abroad have cut their official interest rates sharply to stimulate their economies but the Reserve Bank has cut its repo rate by just 1.5 percentage points since December 2008, to 10.5 percent.
This came after a total hike in rates of five percentage points in little more than two years, which dramatically reduced household consumption.
Household spending shrank nearly one percentage point - seasonally adjusted and annualised - in the third quarter of 2008. In the fourth quarter gross domestic product contracted by 1.8 percent.
Mboweni warned that people should not read too much into a comment he made earlier in February that the bank could hold an extra meeting if circumstances warranted it.
He pointed out that he had used the conditional tense and stressed that he did not use words lightly. He affirmed that the market would be warned in the event of an extra meeting of the monetary policy committee (MPC).
He said growth in the domestic economy would be supported by the "large infrastructure projects we have undertaken. We should be grateful for that kind of forward planning, because without it we would be in serious trouble".
He identified important indicators monitored by the MPC.
One is the current account deficit, which was 7.9 percent of gross domestic product in the third quarter of 2008.
Economists in both the treasury and the private sector have forecast a smaller deficit, which would open the way for cuts in interest rates.
Mboweni referred to nominal unit labour costs, saying they were of concern if they increased out of line with productivity increases.
According to the bank's quarterly bulletin, nominal unit labour costs rose 10.6 percent in the second quarter of 2008. Mboweni yesterday referred to growth of eight percent: "The conservatives in the bank would say this is too high."
Another indicator he highlighted was the output gap: the difference between the potential and actual output of an economy. He said South Africa's potential for growth was 4.5 percent while the economy shrank in the last quarter.
"Given that the world economy is going to contract quite considerably, the output gap is going to widen," Mboweni said. That meant "there is less pressure on the demand side of the economy, which means less inflationary pressure".
He stressed that this was one of the indicators central banks "look at very closely; that's one of the reasons central banks around the world have been providing monetary accommodation more than ever before".
He pointed out that the US economy shrank 3.8 percent in the last quarter of 2008, the euro region 5.8 percent and Japan 12.7 percent. These are quarterly changes seasonally adjusted and annualised.
Mboweni said South Africa could not be insulated from these events.
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